Here’s What’s Happening With Returns At Avaco (KOSDAQ:083930)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Avaco (KOSDAQ:083930) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Avaco:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.16 = ₩24b ÷ (₩213b - ₩64b) (Based on the trailing twelve months to September 2020).

Therefore, Avaco has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 9.8% generated by the Semiconductor industry.

See our latest analysis for Avaco

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Avaco, check out these free graphs here.

The Trend Of ROCE

We like the trends that we're seeing from Avaco. The data shows that returns on capital have increased substantially over the last five years to 16%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 52%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In Conclusion...

To sum it up, Avaco has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 272% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Avaco can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 1 warning sign facing Avaco that you might find interesting.

While Avaco isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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